ECONOMY EXPLAINED | CAR DEALERS CLOSING: Industry roars into reverse

One in 30 new-car dealerships will be out of business by the end of the year, with 1,000 more expected to fail in 2009.

A dozen of those failed dealerships have Georgia roots. One of the nation’s largest Chevrolet dealers, Bill Heard Enterprises, closed 14 of its dealerships, including four metro Atlanta locations, leaving employees and customers dazed and stranded.

The disturbing trend shows the domino effect the nation’s credit crunch is having on a wide range of industries. The auto industry, once one of the most vibrant in American commerce, is now among the most vulnerable.

Most of the nation’s 21,000 new-car dealers haven’t had a profitable year since 2006. Now, the industry is bracing for what experts say will be a slow and painful recovery.

“We are going to see a sharp contraction in that number [of dealerships] over the next year or 18 months or so,” said Rex Henderson, an analyst with Raymond James and Associates who covers AutoNation and other big publicly traded chains of auto dealers.

Murphy’s Law applies

So far this year, Americans have been hit with one startling challenge after another.

“Everything that could go wrong, did go wrong,” said Jeff Humphreys, director of economic forecasting at the University of Georgia’s Terry College of Business.

Soaring gas prices. Falling home prices. Stock markets and 401(k)s plunging. Wall Street financial icons imploding. And now an almost-certain recession that could be deep and prolonged.

In September, new vehicle sales fell to an annual pace of 12.5 million units from 14 million earlier this year, according to Paul Taylor, senior economist at the National Automobile Dealers Association. By comparison, dealers sold 16.1 million vehicles in 2007.

Nationwide, 590 new-car dealerships have closed this year, according to NADA, which projects 700 closures by year-end. Last year, 430 dealers closed. Dealers that sell GM, Ford and Chrysler vehicles are affected the most, experts said, because those automakers have been losing market share to Toyota, Honda and other foreign manufacturers for years.

In Georgia, a dozen new-car dealerships have closed so far this year. The Heard closings —- in which 2,700 people lost jobs —- were so swift that employees are suing the dealer for failing to follow federal laws regarding layoffs.

GMAC Financial Services, which had cut off Bill Heard’s credit a few weeks before, is now considering converting to a bank-holding company to gain access to the federal government’s $700 billion bailout package, according to press reports.

Other local casualties include Marietta Dodge and Team Chrysler in Lithia Springs. Premier Chrysler Jeep Dodge in Decatur closed in October.

The damage goes beyond the dealerships to suppliers, employees and customers. Consider Karen Lipp. A professional horse trainer in Alpharetta, Lipp was blindsided when Heard Enterprises filed bankruptcy.

Lipp learned Heard hadn’t paid the bank loan on the pickup she traded in recently to buy a new pickup at Tom Jumper Chevrolet in Atlanta, which was one of Heard’s locations. Nor had the company completed the paperwork giving her title to her new truck, she said. Now she owes $50,000 for both vehicles, even though one is locked up at the closed dealership.

“I feel cheated and lied to,” Lipp said. “You would think that if you play by the rules you’re protected, but you’re not.”

Now that she owes $1,800 a month on the two pickups, she added, “I’m certainly not going to spend money on things that are not necessary.”

Long road ahead

The credit crunch, which started with the housing market, dealt auto dealers a triple blow. The market for bonds backed by auto loans froze, along with the market for similar bonds backed by mortgages. That, in turn, caused lenders to tighten auto buyer’s credit and then yank some dealers’ access to so-called “floorplan” financing for their vehicle inventories.

Meanwhile, delinquency rates on car loans taken out at dealerships —- which accounts for nine out of 10 auto loans —- have soared, adding to the strain. The percentage of auto loans that were at least 30 days late has doubled since 2004, to more than 3 percent in the second quarter, according to the American Bankers Association. The delinquency rate was almost double that of auto loans obtained directly from banks.

Dealers’ “motivation is to sell a car, so they’re more likely to cut corners on financing,” said Keith Leggett, senior economist for the bankers association.

While the credit crunch has made it harder for customers to get auto loans or dealers to get working capital, people haven’t been in a buying mood anyway.

“The current economic situation is pretty dire, whether you’re looking at auto sales or the general economy,” UGA’s Humphreys said.

The problems started mounting in the first quarter. Oil was trading at $100 a barrel in March. That tipped Georgia’s economy into a mild job-loss recession. By July, oil had soared to $135 a barrel, putting the brakes on consumer spending, the first dramatic drop in 17 years. The auto industry was among the first to feel the retrenchment.

While people were dealing with the shock of $4-a-gallon gas, Wall Street’s woes intensified. Bailouts. Bank failures. Dramatic pendulum swings in stock values.

“We’ve survived a true financial panic. Those are very rare events. The people who are in their 80s and 90s now remember the last time we saw full-fledge panic,” Humphreys said. “Anytime you have a credit crisis plus the bursting of the housing bubble, you have a longer and deeper-than-average recession.”

Auto dealers are feeling the sting more than most businesses because buying a car is such a hefty purchase.

“Consumers will be tight-fisted,” Humphreys said. “They’ll be trying to rebuild their wealth and that will have impact on big-ticket items. The auto sector will be one of the last to benefit from the recovery.”

Those who do buy will be looking more at used vehicles vs. new ones. And that is already reflected in the price of new and used cars.

The average price of new autos has dropped more than $3,000 compared to last year, to $25,308, according to the NADA. Average used-car prices only dropped $200 during the same period.

“It’s a sign that they are more conservative in their choices,” said Taylor, the NADA economist.

Surviving the slowdown

Like their customers, auto dealers and lenders also are making adjustments. Lenders are requiring auto buyers to make larger down payments, offering shorter loans and demanding higher credit scores, said Leggett, with the banker’s association.

Many dealers are cutting staff and using other strategies to cut costs or boost revenues. One such strategy has dealers focusing more on the service side of the business, which can generate 40 percent of a dealer’s gross profit, said Henderson, the Raymond James analyst.

“That parts and service business is something they can use to stabilize” the dealership, he said.

On a recent Monday, the scene at Steve Rayman Chrysler, Jeep and Dodge in Union City seemed relatively busier than at a few other nearby dealerships.

Still, the sales numbers have been weak. Despite heavy advertising and rebates that can hit $10,000 on some vehicles, the dealership sold 11 autos the previous Saturday —- half of its year-earlier volume.

But General Manager Jim Long III isn’t complaining.

“You hit 10 cars, you’re doing good,” said Long, a former Marine who got in the auto sales business 17 years ago after serving in Desert Storm. “It’s like being in the ocean. You can stop swimming and drown, or keep moving.”

Instead of obsessing over making sales in the showroom, he said the dealership has turned its attention to helping customers squeeze more miles from well-worn vehicles. He’s seen more customers driving up to the lot in vehicles with odometers registering 100,000 miles, 140,000 miles and more.

“It’s like when you’re 90, your knees don’t work as well,” Long said.

Customer Areather Scott was there to have the 2005 Chrysler 300 she’d recently bought from the dealer serviced.

“It was a very good deal,” the security guard and Duluth mother of three said of her $14,000 purchase.

The dealership helped her find a bank willing to loan her the money. She hadn’t planned on buying a car but when her Toyota Sequoia was totaled in an accident recently she had no choice. She had hoped to buy a new car, but sticker shock helped her to settle on the used Chrysler 300.

“I went for what was affordable,” she said. “I cut out all of the wants and only get needs for now.”

SALES DROP

Number of new vehicles sold in the United States (in millions)

2008*: 13.7-14

2007: 16.1

2006: 16.5

2005: 16.9

2004: 16.9

2003: 16.6

2002: 16.8

2001: 17.1

2000: 17.3

1999: 16.9

1998: 15.5

*NADA projection

Source: National Automobile Dealers Association

 SHANNON PEAVY / Staff 
AUTO DEALERS FACE THE BIG CHILL 
Dealerships are struggling with the credit crunch and plunging auto sales. About 700 could close their doors this year and 1,000 next year, experts say. 

Graph compares consumer delinquency rates of direct bank loans and loans through dealerships, from years 2000 to 2008.

Source: American Bankers Association